Once and future king

A bank built upon decades of disciplined growth is poised to “come out of this crisis stronger than it went in.”

By Tim Gray

To paraphrase Dr. John, he was in the right place, but it must have been the wrong time. Kelly King had spent 36 years, his entire career, at BB&T Corp., playing a key role in turning a sleepy Eastern North Carolina bank into one of the nation’s largest financial holding companies. But when he finally got the top job in January 2009, assuming the CEO title his friend John Allison had held for nearly 20 years, the banking system was in crisis. With the economy wallowing in the worst downturn since the Great Depression, running the bank was like running a gantlet — bashed by forces beyond his control and forced to bend to the government’s mercurial demands. Then, not six months into the job, he had to pull the trigger.

Within days, the letters started arriving. They accused him of incompetence and, worse, bad faith. Just another selfish executive out for his own gain and aggrandizement, the writers said, no better than a Wall Street scoundrel. The decision that brought the hate mail — cutting BB&T’s durable dividend from 47 to 15 cents a share — was the hardest of his career. “I knew it was the right decision,” he says, “I knew it then, and I know it now.” Truth is, he had little choice. Not only were regulators pressuring any bank that had taken bailout money to limit payouts, but the sluggish economy was dragging down earnings. “In looking forward, we could see that our problem loans were going up — less than the industry average, but they were going up.”

The irate shareholders didn’t give a damn: They wanted that dividend back. For nearly four decades, roughly from the time King entered its management-training program, investors had been able to count on a rising payout from BB&T. But while it has weathered the storm better than competitors — one of only three large regional banks in the U.S. to turn a profit in every quarter of the financial crisis — BB&T still faces challenges. Earnings declined 51.3% last year. The economy remains weak. Through the end of the first quarter, problem loans had continued to rise. Robust profitability gains might not return until next year or even the year after. Reaching the top, Kelly King still has a long row to hoe.

At 61, he may be one of the last of a Tar Heel archetype — the tobacco-schooled striver who traded tending the golden leaf for harvesting greenbacks. A generation ago, it seemed like every other corporate chief had grown up on a tobacco farm. King’s family had one outside Zebulon, east of Raleigh. Working that patch cultivated a deep desire to escape. Summers, he would toil six days a week. “I had some kind of allergy, and almost every night, I was throwing-up sick. But you didn’t have any choice. It wasn’t like, ‘Hey, Dad, I don’t want to do this.’”

He saw sales as his way out. Companies always needed salesmen. Starting in high school, he took a series of part-time jobs where persuasion paid off — first peddling men’s clothing, then appliances. As an undergrad at East Carolina University, he hawked vacuum cleaners door-to-door. “I once made a sale a night for 17 straight nights, and our vacuums weren’t cheap — $500 back then.” Finishing his bachelor’s in business in 1970, he enrolled in the MBA program. Graduating first in his class, he interviewed with Johnson & Johnson and Procter & Gamble. He didn’t consider banking until a classmate, Henry Williamson, suggested BB&T. They joined the bank together in the summer of 1972. Scott Reed, another young MBA out of UNC Chapel Hill, started then, too.

That BB&T little resembled the bank of today, which has assets of $165.8 billion and offices in 12 states, from Maryland to Texas. Based in Wilson, where its roots reached back to 1872, it was a sleepy outfit that mostly did farm loans. Banking was stubbornly boring back then; most bankers didn’t fancy themselves innovators. They were burghers more likely to have low golf handicaps than a grasp of high finance. Outwardly typical, BB&T had begun to upgrade. A year before hiring King, it had hired Allison, a Carolina graduate who would earn his MBA at Duke. Ken Chalk, another ECU MBA, soon arrived. Often, guys like this feel a need to compete and one-up each other, but these five bonded over baseball, backyard barbecues and banking. They didn’t know it then, but they all would spend their careers at BB&T — five friends working side by side for more than three decades.

If their relationships were placid, work life wasn’t. BB&T gurgled with conflict in the ’70s as two senior executives fought for control. One, Vincent Lowe, wanted modernization. The other, Al Wiley, resisted. “Mr. Wiley was from the old school — very dictatorial and autocratic,” King recalls. “Those two were really going at it, battling it out all the time.” The CEO, Thorne Gregory, was oblivious. “Thorne was a prince of a human being but didn’t know squat about banking,” King says. Born into the business — his father had been one of the organizers in 1906 of Bank of Halifax, which merged with BB&T in 1968 — his real love was politics. Gregory served five terms in the General Assembly, where he had chaired, among other things, the House banking and finance committees. “He spent most of his time in Raleigh,” King says

As Raleigh city executive, King regularly lunched with his boss, who one day asked if he thought everything was OK at BB&T. King was aghast. “I said, ‘No, no, it’s not OK, Thorne. You’ve got Wiley and Lowe fighting it out, and a number of us are getting frustrated. You could lose some key people.’” Gregory seemed surprised. “He looked at me as innocent as a 5-year-old and said, ‘What should I do?’ I’m like 28 years old, but I said, ‘You should get us in a room and get the feedback.’ I had to go back to Vincent and tell him. I had to call the other guys and say that Thorne wanted to meet with us. We all could’ve been fired on the spot.”

At the meeting, Gregory listened, poker-faced. Soon, he fired Wiley and named Lowe chief operating officer. “Vincent organized all five of us under him.” In 1982, Gregory died unexpectedly. Lowe stepped into his job and made Allison COO. That could have curdled cohesion but didn’t: Nobody disputed Allison’s smarts. (He reads philosophy for fun and, in retirement, teaches at Wake Forest University.) Besides, Lowe was in his mid-40s, and they figured he would probably be chief executive for the next 20 years.

King doesn’t deny he had designs on being the boss somewhere someday. The ambition that led him to leave the farm still burned. It had earned him a good job, a nice salary and a house on a lake. He was married, with his first of two children. He was also miserable. “I went through this period of deep introspection. I thought about life. About death. I wanted to understand all the pieces and why they weren’t working for me. I was in an unhappy marriage — that was part of it. When I got through with it all, I pulled over to the side of the road one day and cried like a baby and said, ‘God, I don’t understand who you are or what you are, but I’ve decided that something is greater than me.’” He had been raised religious but attended church mostly to maintain appearances. “I had a shallow faith.” The crisis changed him. He joined a Bible study with Reed. He would eventually teach Sunday school.

Belief is one of the few things that divided what would come to be known as the “Gang of Five.” King, Reed, Williamson and Chalk were Christians, but Allison became a proponent of philosopher Ayn Rand. Today, Rand’s Objectivism, with its emphasis on rational self-interest, draws attention for its celebration of capitalism. Just as central to her thinking is rejection of religion, which she considered the negation of reason. When asked about Allison’s views, King says: “We’re 180 degrees apart on that, but on business matters we’re 99% alike.” The precept on which he and Allison had the greatest unanimity was the need to expand. Banking was headed for greater deregulation. BB&T needed scale to compete. Once Allison became CEO in 1989 — Lowe, too, had died unexpectedly — the five friends aligned behind that goal.

Thus they marched across the South, doing about 60 bank and thrift acquisitions. Their approach resembled those of competitors: seize opportunities as they arose and squeeze efficiencies out of acquired banks. If there was a difference, it was discipline. BB&T was intent on not overpaying and seldom did. It didn’t covet any particular part of the country for its own sake; the five didn’t need to have a presence in California or New York to show that they mattered, avoiding such costly missteps as Charlotte-based Wachovia’s acquisition of Golden West Financial. The key deal came in 1995 with Southern National Corp. The banks were roughly the same size, but what was billed as a merger of equals ended up looking like a friendly takeover. Allison remained CEO, with King, Williamson, Reed and Chalk clustered around him. The only noticeable difference was that they moved the headquarters from Wilson to Winston-Salem. The Twin City’s days as the state’s commercial center were past, but it sat athwart the thriving urban crescent that stretched from Charlotte to Raleigh.

As much as is possible in modern banking, BB&T developed a niche, says Dick Bove, a bank analyst with Stamford, Conn.-based Rochdale Securities. It focused on lending to small and medium-sized Southeastern companies. “Wachovia and Bank of America were selling uniform products through uniform delivery systems,” he says, while BB&T developed a suite of products tailored to its target customers. In addition to basic banking, it offered insurance and receivables factoring, among other things. “BB&T’s customer base wasn’t the guy making a lot of rotten mortgages. It wasn’t the speculative home builder. It was businesses operating in their home market.” It also was conservative in underwriting its loans, which is why it managed to chug through the financial crisis without a money-losing quarter. “They dramatically outperformed other banks,” Bove says. “Wachovia isn’t in business anymore. Bank of America lost staggering amounts of money. SunTrust [based in Atlanta] can’t seem to find a profit.” For 2009, BB&T reported net income of $877 million, $1.15 a diluted share, compared with a profit of $1.5 billion, $2.71 a share, in 2008.

Another tenet of the five’s management philosophy was orderly succession. They didn’t want to retire simultaneously and leave their bank floundering. COO Williamson left in 2004, succeeded by King. Chief Financial Officer Reed exited in 2005. Chalk, the chief lender, resigned in 2008. Allison surprised many people, announcing in August of that year that he would step down, though he would remain chairman through 2009. “I didn’t even know when John planned to retire,” King says. The logical successor, he had participated in every major decision of the past 25 years. Yet that didn’t fully prepare him for the mess he stepped into.

The financial crisis had erupted earlier that year when regulators forced Bear Stearns’ sale to JP Morgan Chase. In September, they rattled markets around the world by letting Lehman Brothers fail. The next month, they ushered Wachovia into a deal with Wells Fargo. Credit markets dried up that fall. “It was scary,” King recalls. “There were days where money was not moving. You knew that it was critical enough that it could create a downward spiral that would be really bad for everybody. Once you create a massive panic, everybody is going to be at every bank’s door. Then I don’t care how strong you are. If all of our clients show up tomorrow morning and want all of their money, we don’t have it.”

No bank seemed immune, and their stocks were plummeting. BB&T’s slid from about $40 to about $25 a share in the last quarter of 2008. (As of early June, it had recovered somewhat, trading at $30.52 a share, up about 20% in 2010. For the last five years, it’s down 25% but has outperformed the Dow Jones bank-stock index.) The government’s solution to the crisis was the Troubled Asset Relief Program — direct investments in the biggest banks. Regulators didn’t want a replay of the Great Depression. “They said, ‘We’re going to give this money to the healthy banks so they’ll make more loans,’” King says. “There’s never been one short sentence with so many inaccuracies in it. It was no gift. The investment was pretty doggone expensive. They didn’t give it to the healthy banks — they gave it to the biggest banks. Then they said they were going to give it so we’d make loans. The healthy banks were already making loans.”

King believed that ailing banks should have been forced to file for bankruptcy and sound ones shouldn’t have been forced to take the money. He worried that TARP would stigmatize BB&T, which turned out true: “I’d talk to people and they’d say, ‘I thought you guys were a good bank, but you took TARP, didn’t you?’” It received $3.1 billion, handing over preferred stock in exchange. Why didn’t King just refuse? “I think if we had said we weren’t going to do it, they would’ve said, ‘Then we’ll judge you to be undercapitalized.’ Once they do that, then they can proceed to close you down.” A Treasury spokeswoman wouldn’t comment on his contention. But at the time, officials said banks needed an infusion of federal funds to bring calm. Later events proved them right. Markets did settle, and no other company failed in the chaotic fashion of Lehman. But the price of intervention was that sound banks such as BB&T had to swallow the same bitter medicine as shaky outfits like Citigroup.

To leave TARP, banks had to raise capital by selling common shares. King also elected to cut the dividend. He knew shareholders would protest but saw little choice: In addition to pressure from regulators, internal projections showed loan losses rising. Here, the salesmanship he had been practicing since boyhood came into play. He had to pitch his plan both to institutional investors and to existing large shareholders. “Daryl Bible, my CFO, and I locked ourselves in a room from 7 o’clock in the morning until 7 o’clock at night. We were on the phone with large institutions that could potentially buy a lot of our stock. We’d talk to them for 30 or 45 minutes and answer their questions. Simultaneously, I had my other executives divide up the top several hundred of our shareholders and call them and tell them what was going on. Mostly they understood. They didn’t like it, but with the exception of one or two, took it in stride.” In May 2009, BB&T raised $1.7 billion. It exited TARP the following month.

The government’s dealings with BB&T weren’t done. A few months later, regulators called again — only this time their entreaties weren’t unwelcome. They wanted BB&T to bid for Colonial BancGroup in Birmingham, Ala. Colonial’s CEO had already approached King about a deal, but he had passed: Colonial looked like a tar pit of bad real-estate loans. Besides, King suspected he might have another, better chance if regulators seized the bank. That’s what happened in August. The Federal Deposit Insurance Corp. “effectively put it into an auction,” he says. “We found out about it one Friday night and had until the following Tuesday to make our bid. That Thursday night, they told us we had it.”

BB&T would own Colonial, with 350 branches and 4,500 employees, in less than 24 hours. By the close of business that Friday — Aug. 14 — those folks would be working for an out-of-state company that many of them knew only as an abbreviation. But two weeks earlier, King had made a bet, laying plans in case BB&T managed to snag Colonial. “We had 500 people on standby. We told them, ‘We’re working on a potential deal, and we want you to have your suitcase packed. You could be gone two or three weeks.’ We had charter planes lined up. When we got the call, people went to the planes.” On Aug. 14, the FDIC sent an e-mail to Colonial employees, informing them of the deal. “The minute that that e-mail went out, our people walked up to the doors of all of those branches and said, ‘Hello, I’m from BB&T.’”

If regulators were boogeyman during the financial crisis, they became BB&T’s buddy with Colonial. The FDIC agreed to absorb the losses on a big slug of Colonial’s riskier loans. Responsible for losses on only part of the portfolio, BB&T got the branches and $20 billion of deposits. The deal gives it a total of 1,800 branches and more than 30,000 employees. A possible downside is a significant expansion of the bank’s Florida presence. Real estate, in a place dedicated to vacationing and retirement, accounts for a big part of the economy, which could delay recovery. And Florida is an extreme example of the challenges that BB&T faces throughout the sunny swath of America where it operates. More so than, say, New England, the Southeast hasn’t recovered from the recession. Unemployment in Florida and the Carolinas, for example, remains higher than the national rate.

Thus BB&T’s provision for loan losses has risen over the last several years. “They have lots of commercial real estate on their books, and it’s possible that the commercial real-estate risk hasn’t peaked yet,” says Jaime Peters, an analyst with Morningstar. That could continue to hamper profits. But the bank, she says, will be well positioned when the region’s economy does improve. “BB&T is one of the few banks that will come out of this crisis stronger than it went in. They’ve built up their capital. And the sunshine that brought all the growth to Florida hasn’t gone away.”

So in many ways, as far as he’s come, King is back in that tobacco field. You break your back planting, hoeing, worming, suckering, topping and pulling, but you can’t work the weather, which ultimately controls your crop. Still, you do your best to make it thrive under any and all conditions. BB&T has been well-tended. Credit that to Kelly King and four close friends.